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Taxing Chinese Textiles in the EU

China says it will raise taxes on a range of textile exports to calm an ongoing trade dispute with Europe and the United States -- a reaction to new restrictions imposed by the US and threats by the EU to do the same.

Chinese exports of underwear to the US have tripled since January

Free trade on the previously strictly regulated textile and clothing market lasted only four and a half months before the US re-imposed quotas on several categories of Chinese textile imports and the EU opened an investigation which could end with similar results.

The EU on Monday actually moved towards imposing limits on some types of surging Chinese textiles after member states voted in favor of opening formal negotiations with Beijing.

The EU's textile committee approved a proposal by EU Trade Commissioner Peter Mandelson to launch formal talks with China on a surge in exports of T-shirts and flax yarn.

"Following the committee's approval, the decision to launch formal consultation should be taken by the commission on Wednesday," the commission said in a statement.

As it turned out, Chinese textile and clothing manufacturers were well-prepared for the expiration of the 30-year-old system that limited the amount of textiles that could be imported from one country.

For 126 product categories covering 60 percent of European and American textile and clothing imports, the markets became freely accessible this past January. The Chinese took advantage of this, to great success. Since January, exports to the US and European markets grew in leaps and bounds.

In Europe for example, imports of knitwear grew 500 percent; for men's pants, 900 percent. Exports of underwear to the US tripled, while exports of cotton pants grew 15-fold. According to information from the US government, 18 factories closed in the US as a result, and more than 16,000 jobs were lost.

EU countries worried

A Chinese worker pieces a garment together at her sewing machine at a wholesale garment factory in Beijing

Leading the European coalition for tighter restrictions on textile imports from China are Italy, France, Spain, Portugal and Greece. Reacting to the demands, the EU Commission has opened an investigation, and announced that it would introduce restrictions on imports of T-shirts and flax yarn from China -- measures some analysts said were unfair.

"The point of the WTO agreement was to simply phase out the quotas, so that we would have free trade," said Dean Spinanger from the Kiel Institute for World Economics. "If one country is better than another country and for that reason can export more, that's not a crime. Just the opposite -- all countries would like to be in that position."

Germany's economics minister, Wolfgang Clement, is against restricting free trade in principle. He doesn't hide the fact that Germany's textile industry prepared itself for the liberalization of trade agreements by reducing its capacity, closing several companies and shedding thousands of jobs.

Built into the contract governing the end of quota restrictions on the textiles sector are transition regulations valid until 2008. According to these regulations, Chinese textile exports are permitted to grow by 7.5 percent annually. The EU has set quantitative threshold values which, if overstepped, are meant to be resolved with China through informal negotiations.

Speaking at the World Economic Forum on Monday, the EU's Mandelson said that he opposes the return of quotas on Chinese textiles, but added that the flood of cheap clothing shipments needed to be quelled.

"That transition needs to be managed," Mandelson said, but added: "I don't regard China as a threat in the medium or long term. I regard China as an opportunity."

Disadvantaging consumers?

Just like the American government, the EU Commission is mainly concerned with domestic companies and jobs that are threatened by the gigantic increases in China's exports.

Chinese Trade Minister Bo Xilai said that industrial countries only support free trade when it's to their advantage. When they see their interests being threatened, though, they reach for "protective measures."

According to the WTO, such "double standards" are not allowed. The German Chamber of Commerce is just one of the voices warning that a retreat to the trade restrictions previously governing the textile industry would mean sliding back into protectionism that would only serve to disadvantage consumers buying textiles on the European and US markets.